Supply chain risk management is critical on a global scale. Modern supply chains are fraught with risk and complex supply chain risk management that can result in volatility and increased operational costs, large and sometimes devastating losses, and long term damage to the corporate reputation.Of the four major categories of risk, the costs of non-compliance risk is probably the easiest to quantify, and these costs alone should scare you.
For example, consider the recent settlements by Washakie Renewable Energy 1 , ExxonMobil 2 , and Noble Energy 3 in the United States for $3.0M, $3.19M, and $4.95M for violations of the energy policy, clean water, and clean air acts, respectively as well as the recent $13.2M settlement by Lumber Liquidators 4 for violating the Lacey Act.
One could also consider the recent settlements by Sysco 5 and OtisMed 6 Corporation for violations of the California and Federal Food, Drug, and Cosmetic acts for $19.4M and $80M. Or, one could consider the headline making settlement by Gibson 7 (Brands Inc.) in 2012 for a violation of the endangered species act. The fine was paltry in comparison to the tarnish it put on the esteemed Gibson brand. These are just a few examples of large fines that resulted from non-compliance, which is not the only category of risk that a corporation needs to be on top of. The overall risk in a global supply chain is staggering, and the smartest Supply Chain leaders are taking proactive action to mitigate these risks and the million dollar liabilities that accompany them.
They are tackling:
- Risk of fines from non-compliance (away and at home)
- Product cost increases from volatility risk
- Revenue loss from supply disruption risk
- Value loss from brand risk
As a result of headline-making supply chain calamities, these risks are quantifiable in terms of fines, revenue losses, and long-term stock price reductions as a result of loss in brand value. For example, back in 2003 Hendricks & Singhal 8 found that announcements of supply chain problems, on average, decrease shareholder value by 10.28% and a recent study by CIRANO 9 found that there is an 80% chance of a company losing at least 20% of its value at least once during a five year period. Furthermore, as a result of new and updated national and regional acts and legislation (around the globe) that increase an organization’s responsibility for their products, services, supply chain and supplier compliance (e.g. the US FCPA, UK Modern Slavery, France devoir de vigilance, etc.), these risks are just increasing and supply chain risk management is needed.
The good news is that these risks can be avoided or significantly reduced. How? We’ll get to that, but first we have to understand the risks so that you understand not only why the organization needs to take action, but the actions that can be taken and how you can handle them using proper supply chain risk management.